I have a question related not directly to trading but to DEBT MUTIAL FUNDS, recently i started keeping some part of my capital in DEBT MFS, but last week NAVs of my DEBT MFs (Not one but all 3) fell sharply in a couple of days, was it due to FOMC meet and foreign investors doing bulk redemption? Do I need to worry? Should I in future keep doing partial profit withdrawals from my DEBT MFS? Do let me know …
Yes , its due to the interest rate hiking preponement to 2023 by Fed
If you know your modified duration and you’re prepared to wait till your fund’s modified duration and satisfied with its YTM , just sit back and relax cus those returns are ALMOST guaranteed provided its guilt fund. If you have shorter horizons , would suggest you to get out of high modified duration funds as I dont see them delivering even 5% returns in the coming few years.
If you have low duration , liquid or floating rate funds then well and good , nothing to worry about.
@Sai_Krishnan Thats’s a lot of good information i can use to make current and future decisions , Thanks so much. I would highly appreciate if you could answer a more specific question if you could please let me know, I am invested in 2 Corporate Bond Funds and 2 Strategic Bond funds, Do I need to exit them ASAP or can I wait? Thanks In Advance.
Corporate Bond funds typically follow accrual straregy(they accumulate the interest and add it to the NAV instead of shuffling between schemes). Corporate bond funds should be safe given the current scenario(provided there is no credit risk from the corporates, check your funds portfolio)
On the other hand, strategic bonds have varied modified duration in their portfolio(major shuffling happens), I’d say it is more or less dependant on the fund managers timing capability. Your modified duration of the fund keeps changing as per fund managers interest rate outlook. Do some more research about the funds and come to a conclusion.
@Sai_Krishnan how do you see the Govt. bonds?
In the span of the last 1 year, the first 6 months were pathetic. Last 6 months have little improvement. But overall it’s lagging behind historically. How do you compare the Govt. bonds with the Corporate bonds in the next 1-3 years range?
Do you mean gilt funds or direct govt bonds?
Next 3-4 years I personally would personally would not invest.
Before 6 months , the govt in its budget mentioned about its lending plans, so the outlook of the interest rate changed, as a result yields increased and bond values decreased.
From then on yields have sort of stabilised till today.
However, note that before 6 months just the interest rate ‘outlook’ changed. The actual Repo rate was constant. When the actual rate increases, the impact would be much more.
Below is the screenshot of India 5y bond yields, if you think the yields will move up from here, the bonds which you hold now will have less value in the future as they will be out of demand, vice versa if you think yields decrease
Its pretty apparent acc to me that the yields and interest rate have bottomed amount. Always remember that they are inversely proportional to your returns if they increase or decrease.
Corporate bond funds should do better according to me in the present scenario as I mentioned in my earlier comment .
Hey @Sai_Krishnan You seem to have pretty good knowledge of debt funds.Can you please answer my few queries ?
1.) Which debt fund categories have interest accrual strategy apart from corporate bonds funds ?
2.)Funds which have varied modified duration doesn’t add coupon interest to the NAV ? And do they just keep on shuffling the papers without getting any interest ?
3.) What are the examples of strategic bonds ?
What is your outlook on Short term funds?
Thanks A Million @Sai_Krishnan Sir, these little bits of information you have provided are nuggets of gold. I will check over the portfolios of my Debt Funds in the weekend. The Strategic Funds seemed to have bounced back better, the Corporate Funds are a bit slower to continue upward but they are also rising , I think one reason might be that most of the Strategic Bonds have exit loads so that discourages frequent and mass withdrawals. Was not invested in any pure Gov Securities or Gilt Funds but post insights shared by you will try and invest some. Thanks so much again for the valuable insights. Cheers Vivek
- Credit Risk funds , Liquid funds , short term funds and floating rate funds all follow accrual strategy. Floating rate is my personal fav in the current scenario.
- NO they do add the interest received in the NAV nothing like that , but the interest received MIGHT have less impact due to the yields of the bonds they hold fluctuating constantly(interest added is hard to identify by the change in NAV)
- ICICI has all seasons bond , some AMC’s have Dynamic bonds , IDFC has strategic bond , all follow the same principle and are comparable.